The US dollar is getting stronger against EM currencies on renewed Trump trade war tensions and oil is also getting some boost on hopes of OPEC+ cut this week by around 1.4 mbpd coupled with growing US Congress pressure on Trump to act on the Saudi crown prince Salman (MBS) for the Khashoggi thriller (killing).

Meanwhile, India’s November service PMI jumped to 53.7 from prior 52.2 sequentially, stronger than expectations of 52.5. Monday data shows that India’s November manufacturing PMI also surged to 54.0 from 53.1 sequentially, stronger than expectations of 52.6. Subsequently, India’s November Composite PMI surged to 54.5 from 53.0 sequentially and the highest since October’2016.

All eyes will be now on the RBI, which is set to hold the rate at +6.50% in December meeting with a dovish stance (dovish hold), considering that Indian currency Rupee (INR) has strengthened against USD from October low of 74.49 to December high of 69.76. USDINR is now trading around 70.50, slightly above the government red line of 70.00. Brent oil plunged from the September high of 75.64 to the November low of 57.50 and is now trading around 61-64 level, slightly lower than the government red line of $65.

More importantly, the Indian 10Y bond yield is now hovering around 7.55%, significantly lower than the September high of 8.23% caused by the dual shock of a weak currency and higher oil (surging CAD). The Indian 10Y bond yield around 7.55% is also in line with the historical spread of around 100 bps (1%) with the RBI repo rate, currently at +6.50%. Thus the market is not expecting any further rate hikes currently by the RBI in FY-19 (till March’19).

The RBI will now focus on the Fed’s revised December dot-plots for their rate hikes trajectory in 2019. The Fed is inching closer to its median neutral rate of 3.00% and may hike twice in 2019 (H1/H2) to reach there against 4-hikes in 2018. But the big question whether Fed will stop its “loco” just at neutral (say at +3.00%) or just above neutral (say at +3.50%). This will depend upon Trump’s actual trade war rhetorics and whether Trump will eventually go for higher tariffs like 25% on Chinese goods because it now seems that tariff and oil inflation is now the only source of price rise in the DM/US. The Fed is prepared for a symmetrical +2% US core PCE inflation (i.e. a range between +1.75 to 2.25%) under the current policy framework.

Again, considering all the pros and cons, Trump will not go for 25% China tariffs and also goes soft on Iran for his oil sanction narrative as all these could destabilize the price stability in the US and induce higher inflation and public unrest like we are now seeing in France and some Eurozone states for higher fuel/energy tax (yellow vest protest).

At the same time, Trump will stick to the present 10% China tariffs and other modes of tariffs like on imported metals because it’s helping him to balance the fiscal equation to some extent for his tax cut, without any significant price inflation in the US as USD strengthened and Yuan devalued by almost 10% to neutralize Trump’s 10% tariffs.

Thus, the Fed may target its median neutral rate at +3.00% in the medium term to stay ahead of Trumpflation(inflation) curve amid Trump’s trade war whims & fancies and the US bond yield (10Y) will again stabilize above 3%. At historical 500 bps spread, the Indian 10Y bond yield will also stabilize above 8% in 2019 and RBI may have to hike by 0.50% in FY-20 to reach at 7.00% to maintain the spread at 100 bps, everything being equal.

Talking about Indian inflation, although the headline CPI is on the lower trajectory, now at around +3.31% in October, from a peak of +5.21% in Feb’2018, the core inflation continues to be in the higher trajectory above +6.00% and touched around +6.35% in October.

Policymakers from all over the global central banks are now actively following core inflation or core inflation expectations (US core PCE) in formulating their monetary policy, but RBI does not acknowledge it officially all the times. At times, it’s following the headline CPI, sometimes the core CPI and surprisingly, in October meeting, followed the core CPI without housing inflation component (i.e. core core CPI in Japanese style) to stay pat as in the history of RBI, hiking for three consecutive times is very rare.

RBI is also itself confused about the credibility of CPI as-well-as GDP data, which are two critical aspects of its policy formulation, considering lack of other real-time leading data like employment, wage growth, retail sales, housing in India. Actually, RBI as-well-as other government policymakers are driving the Indian economy “without headlights in the night” as there are little credible economic data and it’s a legacy issue.

The government on its part could do more by producing credible data with the help of UID and India’s growing online infra status rather than manipulating GDP data and distorting actual inflation figure for political populism.

As India’s core inflation continues around +6%, GDP at +7%, the economy is certainly running hot and thus RBI may stick to its “calibrated tightening” mode in the days ahead contrary to some expectation of reverting to the earlier “neutral” mode.

At an average +6.00% core inflation the real rate of interest in India is now at around +0.50%, which is on the lower side even in the Fed’s perspective. As per RBI, the neutral (real rate of interest) should be around +1.00 to +1.50%. In that sense, in FY-20, RBI will go for another +0.50% hikes at least to reach +7.00% in the repo rate, if the core CPI continues to hover around the sticky level of +6.00%.

A dual combination of higher USDINR at around 75 and higher oil, also around $75 could be lethal for the Indian economy in FY-20 amid surging imported inflation and higher borrowing costs.

Technical View (Nifty, Bank Nifty, USDINR-I):

Technically, Nifty Fut-I (NF) has to sustain over 10905 for a further rally to 10935/10995*-11025/11085 and 11130/11165-11235/11295 in the near term (under bullish case scenario).

On the flip side, sustaining below 10885 NF may fall to 10805/10785*-10705/10675 and 10625/10595-10550/10500 in the near term (under bear case scenario).

Technically, Bank Nifty Fut-I (BNF) has to sustain over 26775 for a further rally to 26875/27075*-27200/27350 and 27550/27750-28000/28150 in the near term (under bullish case scenario).

On the flip side, sustaining below 26725 BNF may fall to 26600/26500*-26300/26050 and 25850/25700- 25400/25250 in the near term (under bear case scenario).

Technically, USDINR-I has to sustain over 70.25 for a further rally to 70.90*/71.15-71.85*/72.20 and 72.75/73.05-73.35/73.75 in the near term (under bullish case scenario).

On the flip side, sustaining below 70.00, USDINR-I may fall to 69.45*/69.30-68.95*/68.50 and 68.25/67.65-67.20/66.95 in the near term (under bear case scenario).

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